Finance and Investments

My favourite emerging market fund is managed by Dr Mark Mobius. He recently visited New Zealand. Some highlights from this presentation;

The Emerging Markets fund has performed exceptionally well. It has appreciated 18 fold since listing, which equates to an annual return over the past 21 years of around 15 per cent. Over the past decade it has gained 12 per cent a year in NZ dollars, trouncing both the emerging markets index which is up 6.5 per cent a year and the broader global markets MSCI index which has fallen 3.0 per cent a year over the past decade.

But 50% declines are almost ‘normal’

Emerging markets have indeed been the place to be over the past decade and Mobius and his team of 40 analysts and managers have delivered returns well about the market. But Mobius is the first to point out that this extra performance comes at a price.

Emerging markets can experience ferocious bouts of volatility. In 1994, 1998 and 2008Emerging markets, and the Templeton fund, fell by 50 per cent in a matter of months as global market weakness hit Emerging Markets hard.

Market outlook dominated by two issues: Money-printing and Derivatives

The first is the vast growth in money supply. Central banks around the world have addressed the financial crisis by slashing interest rates and pouring money into their respective economies. This has driven share markets upwards for two reasons.

First, the dramatic reductions in deposit rates mean many investors have exited their cash investments and shifted their money into shares as they seek higher returns and more income.

The fact that many central banks have effectively been printing money has raised concerns with many investors that inflation could rise sharply. These people are again buying shares as, like property, shares have historically provided a degree of protection against inflation.

The second elephant Mobius identified was derivatives contracts. Derivative contracts are investments like futures and options and other synthetic instruments. He sees the dramatic growth in the use of these investments as a major threat to the stability of markets.

For the record, he is relatively positive on the outlook for the global economy and believes the worst of the crisis is behind us. He does though continue to believe share markets across Emerging markets will continue to outperform the developed markets.